This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader

A plan is only as good as your ability to follow it.

This time of year, many people are deciding between the amount to contribute to their TFSA vs. the amount to put into their RRSP. They correctly start off by calculating the many tax differences that will affect them now and in the future. When coming up with a trading or an investing plan for yourself, make sure you factor in your own discipline level and personality so you will have an actual ability to follow your own plan. One key element of the TSFA vs. RRSP decision to consider is that an RRSP has a penalty when making an early withdrawal (the withdrawal gets added to income and taxed), but there is no penalty for the TSFA. If your goal is to create long-term savings and if you are someone who finds it difficult to prevent turning a long-term savings account into a new car in 3 years, the RRSP could offer you more value than just a break on some current taxes. It could be the help you need to not dip into a long-term savings plan.

As high fees for many financial services in Canada push people to become DIY investors, make sure your trading and investing personality is included in the strategies you utilize when making your investing decisions. Trading has an emotional component to it and at home traders need to acknowledge their own faults to be able to create an effective plan for themselves. A proper trading plan must always factor in your trading personality. Let’s say you are considering buying a volatile stock, ABC, that is now priced at $20. You think ABC will rise to $30 but you also make a plan to sell if it drops to $15. Overall, not a bad strategy, but will you actually sell it at $15 if it falls? As a trader, re-evaluating a position before making a decision is important. Some traders, however, have a bad habit of turning a “re-evaluation” into “search for a reason to hold a stock I don’t want to sell and cement a loss”. When you are making your trading plan for a particular stock, make sure it is one that you will actually follow through on.

Some traders have a hard time selling a loser. Other traders actually have a hard time selling a position that reaches their target. They convince themselves it will just keep going higher, not on facts, but just because they like being in a winning trade. Using the ABC example, that type of trader would buy ABC at $20, ride it all the way up to $30, not sell anything and then ride it back down to $20. Choosing to trade a volatile stock is a choice, and make sure your emotional tendencies factor appropriately into that choice.

If you catch yourself thinking or saying these statements about your own trading, it might not be something you should be doing on your own:

“I am down a lot but the market is just so irrational right now”

“They say this market is unprecedented, so it is impossible to make money anyway”

“Those losses were only because of a computer problem.”

“It’s not my trading causing the loses, it’s the market”

Greece is another great example of this concept right now. The Greek leaders have signed an agreement with the EU financial leaders committing Greece to cut spending to such a level that they can make the payments and changes the EU requires them to make. The Greek leaders would probably agree to raising herds of sparkled unicorns at this point, it does not guarantee that the deal will now be carried out and enacted within Greece exactly as the agreement states.

Always remember, what you actually do is what counts in the end, not what you planned to do.

Great post! I think the statement “RRSP has a penalty when making an early withdrawal” might be a bit misleading for some people. Investing in an RRSP simply delays paying tax on that income but there is no extra penalty for withdrawl. A great time to take money out of an RRSP is if you suddenly become unemployed or go on maternity leave. This ensures your money is taxed at a very low rate. For those of us with pension plans, our income will still be significant after retirement. Also lets hope tax rates don’t skyrocket between now and retirement..